Many people who come into a windfall with a personal injury settlement are not sophisticated money managers. Here are some reasons why structured settlements may hold a key to helping them use their awards wisely.
Perhaps the most important consideration when evaluating how to design a structured settlement is the tax liability the plaintiff can expect. Although the personal injury attorney may be doing a wonderful job, he or she may not be as well versed in tax consequences. And, there are few blanket statements we can make about the outcome because they depend much on the plaintiff’s individual circumstances, and those circumstances may change over the period of the settlement payout. It’s important that the plaintiff be counseled to consult with a CPA, tax attorney, or another financial professional before making a decision on a structured settlement that could have a profound effect on the plaintiff’s life for years to come.
Is there a Danger with Annuities?
When you choose a structured settlement, often the defendant in the case will purchase an annuity from an insurance company. The insurance company then becomes the money manager and makes payments to the plaintiff according to the schedule negotiated at the time of settlement. This can last a relatively short time, like five years, and anything up to a lifetime.
Unfortunately, there is always an element of risk. The longer the settlement payout, the more chance there is that the insurance company will suffer financial difficulties along the way or be bought out. Most states have in place a process for rescuing an insurance company or guaranteeing payment of claims such as annuities, subject to claim limits. So, although there is not a great chance of losing money from the demise of the insurance company unless your award exceeds claim limits, you’ll run more risk that something will happen to the defendant company if it chooses to keep the settlement in house. In the unfortunate case of a bankruptcy or an asset purchase, the settlement could disappear altogether.
Should Lump Sums be Avoided?
This must also be compared with the return the plaintiff could potentially receive by taking the award as a lump sum and investing it. Many plaintiffs have had little or no experience managing anything more than a paycheck. They have no experience hiring an investment advisor. Stories abound of lottery winners and personal injury plaintiffs who blew through their awards. Many lose great sums in questionable investment opportunities. Some are outright scammed. At the very least, those with access to a large fund will have to put up those trying to gain their favor to “just help us over this hump” or “if my son gets the operation, it will save his life” calls on their voicemails. A structured settlement may help financially unsophisticated plaintiffs Avoid some of these heartaches.
Are Hybrid Settlements the Answer?
Consider that a long-term annuity and a large lump sum are not the only choices. Fortunately, there’s a lot of freedom in designing a structured settlement. The parties can often come up with a hybrid settlement that would allow for a large lump sum payment, then a guaranteed yearly payment for some period. The payments could start small and increase over the years, or start large and decrease. There could be provisions for unknowable contingencies down the line, like experimental medical procedures, significant uninsured losses, education costs, etc.
Hybrid arrangements may work best when the plaintiff has a particular need or want, like the need to catch up on bills or pay for medical procedures, or purchase a car or a house. They could even take charge of a pool of money to try their hand at managing and investing knowing that there is a protected payment available in the future.
What About Structured Settlement Buyouts?
Even if a plaintiff opts for a structured settlement, they are not necessarily locked into that schedule. More and more companies have risen ready to buy the plaintiff’s annuity or settlement for a lump sum. In return, the plaintiff gives up the right to future payments. Of course, plaintiffs should be counseled carefully if they are considering a structured settlement buyout because they will be almost by definition selling their right to future payments at a discount. Shopping around could pay off for these plaintiffs, but many do not because they are faced with immediate wants or needs and the companies have added to the allure of buyouts by heavily touting their ability to pay off quickly.
For a plaintiff who chooses to take a structured settlement, there are ways to either ensure flexibility and access to the money later or allow a buyout. Tribeca Capital offers competitive terms and quick turnaround on buyouts of structured settlements. If you need money now, contact Tribeca Capital at (866) 388-2288 to learn how we can help.